It is crucial to pick investments that raise post-tax returns. The issue is there aren’t too many tax-efficient investments to achieve goals if you are a typical middle-class working official. Here, we discuss about asset-location decision for goal-based investments.

Asset location

The first step in investment process is to decide on how much to invest in equity and bonds to achieve a goal. This is the asset allocation-decision. The second is how to invest tax-efficiently to achieve asset allocation. This is the asset location decision. It refers to where to locate investments — taxable, tax-deferred, or tax-exempt location.

There is a limit on how much to invest in tax-exempt locations. You can invest a maximum of ₹1.5 lakh a year in public provident fund (PPF) and ₹2.5 lakh a year in provident fund (PF). This means you can invest up to ₹4 lakh a year in a tax-exempt location. Note, we are referring to the tax incidence on investment returns, not the deduction on investments; you can only claim ₹1.5 lakh as Section 80C benefit in any year.

The argument suggests you can derive maximum tax benefit when investing for retirement, as PPF and PF are considered retirement savings. You can also use PPF to fund child’s college education if the maturity of the account (typically 15 years) coincides with the time your child enters college.


Your goal-based portfolio will typically carry equity and bond investments. Your equity investments will be in passive or active funds. Your bond investments will be in bank deposits earning interest income. The tax locations for these investments are well-defined. As your life goals will be for more than one year, your equity investments will be treated as long-term assets (except the systematic investment plans you make within the last 12 months of the time horizon for a life goal). So, your equity investments will attract long-term capital gains tax and will be in the tax-deferred location; you must pay taxes when you realise the gains.

The interest on your bond investments (including accrued interest) will attract your marginal tax rate and will be in taxable location. In short, you may not have many investment avenues for your asset location.

That said, do consult your auditor and understand how to improve your asset location decision.

(The author offers training programme for individuals to manage their personal investments)